In the current economy, many associations are experiencing increased assessment-delinquency rates and resultant cash-flow shortfalls. So, when a delinquent owner sends in a check for less-than-all of the delinquent amount, the association wants and needs to cash it.

Can an association cash the partial-payment check without jeopardizing its right to receive full payment? Sometimes.

The law has long recognized that a “legitimate dispute” between debtor and creditor can be resolved with binding effect if the debtor tenders partial payment with a “limiting instruction” and the creditor accepts the payment. Be sure to examine for and recognize limiting instructions. In these days of payment to offsite lock boxes, that can be difficult. Moreover, many courts today may not make a debtor tow the mark of precise language prominently placed on the check itself.

If limiting instructions are identified, do not merely refrain from cashing the check. Return it with an appropriate letter.

If the payment is free from limiting instructions, the association can and should accept it and apply it to the delinquent account.

How should the association apply the payment? The best practice is for the association to have in-place a written and well-publicized application-of-payments policy which ideally is part of a comprehensive collections policy. In accord with generally-accepted accounting principles, such a policy provides for the application of any payment in order to categories of charges, from oldest charge to youngest within the category. The first category is outstanding legal fees, then late charges, interest on delinquent balance, fines, past due-assessments and, finally, current assessments. Such a policy avoids arguments that assessments have been paid and subsequent enforcement efforts “merely” seek late charges or legal fees.

An application-of-payments provision is included in Orten & Hindman’s recommended form of collection policy. Click here to view the policy.

As can be seen from this brief discussion, partial-payment questions force associations to walk a tightrope. The best policy when in doubt is to consult legal counsel.